Dollar or Pound?

A relative wrote me to ask whether she should change pounds for dollars on the grounds that the dollar has weakened during the debt ceiling showdown and would likely increase in value once a compromise had been struck in Washington DC. This is what I replied:

“I am glad you are so confident that a last-minute deal will avert a technical default. I think a lot could go wrong before then. And if a deal is struck, it will be the two-part Reid-Boehner compromise that in effect will kick the can down the road and will merely delay the reckoning. In other words, this failure of mature government is to be repeated in a few months time.

On the macro-level, I agree with Mohamed el-Erian (PIMCO’s CEO) that long-term damage has already been caused to the U.S. and that international investor confidence has been shaken by what has been taking place in the past few weeks. It is quite likely that the rating agencies will downgrade the U.S., even if the Reid-Boehner compromise is agreed. That will knock the value of the dollar.

Despite the awfully slow economic growth in the UK the last quarter, I still believe that the Coalition is basically on the right track – UK debt reduction is essential and more necessary than debt reduction in the U.S.. For example, the U.S. deficit could disappear with an increase in government revenue, i.e. tax increases. That is off-the-table, alas, at present because of the economic illiterates in the GOP House caucus, who believe incorrectly that any tax increase will restrain economic growth.

In other words, I think the pound is a better bet than the dollar in the medium term. Could you make a small profit by buying dollars now and maybe in a few days time, if a deal is struck, see a dollar value rise and be able to exchange back to pounds beneficially? Maybe you could, but it is a risk and I am not sure that you should be risking your capital.”

And what happens if a deal is not done, even the Reid-Boehner plan? I know there is a temptation to risk but I myself would avoid it.”

 

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